Herd Instinct

Herd Instinct

A sociological phenomenon in which everyone does what everyone else seems to be doing. In investing, the herd instinct is seen most commonly in panic sells and rallies that occur without regard for broader indicators. That is, regardless of the sustainability of a rally or the overreaction of the sell-off, the concept of a herd instinct suggests that traders will continue to follow the trend until contrary evidence becomes overwhelming (or simply until they calm down). See also: Behavioral economics, Crowd.

Since horses follow a herd instinct (jockeys, too, some might say), this inclination towards lemming-like over- exuberance early on in a race -inducing the same potential for self-destruction-is exceedingly difficult to curb.

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